Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Tech Stock Options -- Ignore unavailable to you. Want to Upgrade?

To: David Weis who wrote (48055)	7/20/1998 8:30:00 AM
From: Gabriel008	Read Replies (1) \| Respond to of 58727

David, I've never contributed to this thread but couldn't pass up this little offering courtesy of Cramer on thestreet.com; BTW, new seies of DELL options this am - September series. Wrong! Tactics and Strategies: Cramer on Monday Morning Options Hangovers By James J. Cramer 7/20/98 7:26 AM ET Will there be an options hangover today? Time for a refresher course on how options affect the stock market after expiration. When I was a broker at Goldman Sachs, I used to dread coming to work on days like today. I had a client, let's call him Miserable, both because it sounds like his name and because it described his style of investing, who used to make his living off the first half hour of trading after expiration. One of the reasons why brokerage houses coin money is because there is no receivable problem. Unlike banks, which have to go through difficult repossession of illiquid nonsecurities when they foreclose, here brokerages just reclaim stock, something that is easily valued and sold. If someone doesn't have the money to pay for the stocks when they come due, he can borrow to own them. And if he doesn't have any collateral, then the stocks are sold, and the proceeds returned to the broker. The only time there is a gray area is mornings like this one after expiration. There is an accepted but unwelcome practice of giving clients the free shot Monday morning. In other words, let's take IBM (IBM:NYSE), a stock that I am long. IBM went out at 120 on Friday. Right at the strike. My client, Mr. Miserable, never had enough money in his account. But he knew the rules and the way around them. If he were long 250 IBM July 120 calls on Friday, he would be tempted to exercise them. No matter if he didn't have the cash to buy 25,000 shares, which is what 250 calls would entitle you to. He knew he had a right to exercise and he would take it. What he would be setting up is a free look-see, a call on Monday's opening. If IBM opened up, which he would think it might, maybe because it was held down by options pressure (see any of a myriad stories, including my Intel (INTC:Nasdaq) weekend rewrite from Saturday) he would then lock in the additional gain he got from holding the stock through the weekend. His timely ringing of the register made him good money. He would sell it at 121 and change, satisfied that he had correctly gamed the system. But how about if IBM opened down and stayed down? By 10 a.m. I would have to have the following conversation with Mr. Miserable: Me: "Hey Miserable, what do you want to do about paying for that IBM you exercised?" Miserable: "Looks like that didn't work out, just sell it." All over the country the Miserables of the world get that call today as brokers go over accounts to see has the collateral and who doesn't. If the clients don't, by midmorning a lot of merchandise gets jettisoned. That's why on the Monday after expiration there tends to be weakness midmorning as the Miserables of the world get cashiered. As this process is largely mechanical, not fundamental, it has historically created an interesting buying opportunity. I call it "options hangover" as people pay for the partying too much from the Friday before. If you are a bull and are looking to get in, take advantage of Miserable's weakness and step lively when the high-priced stocks get spit up today. They always do after a strong expiration like Friday's. Like clockwork.